Factsheet: Overdrafts

Want to be able to access extra cash when your
pay cheque doesn't quite last until the end of the fortnight, or at
other times when money is tight?

You may be tempted to get an overdraft on your bank account.

But be careful - an overdraft is just another form of credit,
attracting interest, fees and charges.

How do arranged overdrafts work?

An arranged overdraft is a credit facility
connected to a bank, building society or credit account, which you
apply for or that may be given to you as part of the account. It is
designed to cover short-term needs only, such as having money in
your account to cover bank fees.

You can arrange an overdraft on your personal bank account,
your home loan account or business account.

An overdraft allows you to overdraw up to an agreed amount of
money - an overdraft limit - that is more than you
actually have in your account.

You will be charged interest on the amount of money you use
from your overdraft, and you may have to pay fees and charges as
well.

Overdrafts are usually repayable on demand.
That is, if the credit provider demands repayment, you must repay
the entire amount requested immediately.

TIP: What to check before you arrange an overdraft

Decide whether you really need to arrange an overdraft
facility, or whether there is a cheaper alternative

Find out if there is an agreed time limit on
your overdraft. You may have to pay it back or renew it by a
certain date.

Check the terms and conditions of the
overdraft, especially if it is repayable on demand.

Think twice before you agree to an overdraft on your account to
help someone else, such as a family member or friend - you could
find yourself owing more money than you realise. You could even
risk losing your home or other valuable assets. (See our factsheet
Love
and loans).

What are unarranged overdrafts?

An accidental or unarranged overdraft occurs
if you make a payment but there are insufficient funds in your bank
account to cover it. Your bank or building society honours the
payment anyway, which creates a debt.

While the policy varies between financial institutions, most
cheque or savings accounts allow unarranged overdrafts to take
place. You will usually find that you have agreed to this when you
accepted the terms and conditions upon opening the account.

Some banks will honour your overdrawn payment without charging
you an unarranged overdraft fee, particularly if you are a valued
customer or if it is your first time. Others will charge you a
hefty penalty fee or a penalty interest rate on the overdraft
amount.

TIP: Things to know about unarranged overdrafts

Ask your bank about their policy on unarranged overdrafts, so
that you are aware of the possible penalty fees and interest rates,
should you exceed your available balance.

Penalty fees for exceeding your available
balance can be anywhere from $10 to $30.

Some banks don't charge a penalty fee, but impose a
penalty interest rate on the overdrawn
amount.

Keep in mind that the amount overdrawn plus the penalty fee is
repayable immediately.

Six steps to smarter borrowing

Step 1.

Work out if you can afford to borrow

Before you get an interest-free deal, use the budget
planner to see exactly where you spend your money and how
much you can afford in repayments.

Step 2.

Shop around for the best deal

If you do decide to arrange an overdraft facility, take the
time to compare interest rates, product features and fees and
charges. Even a small difference in the interest rate can make a
big difference to what you have to pay. Shop around online to
compare products or use our multi-loan calculator.

Step 3.

Know who and what you're dealing with

Anyone who wants to engage in credit activities (including
brokers) must be licensed with ASIC or be an authorised
representative of someone who is licensed. If they aren't, they are
operating illegally.

There is currently an exemption from licensing for credit
assistance provided through some businesses (for example, retail
stores and car yards). While the store may be exempt, the actual
credit provider must still be licensed. If you are unsure who the
credit provider is, ask the person you are dealing with to point
out the name in your credit contract.

To find out if a credit provider is licensed, visit
www.moneysmart.gov.au or call ASIC's Infoline on 1300 300 630.

Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit
guide (with information such as their licence number, fees
and details of your right to complain) or a written notice with
details of your right to complain about their activities.

Step 4.

Keep up with your repayments

You need to make sufficient repayments to keep the overdraft
debt below the agreed limit. Even though your
overdraft may not have a set repayment schedule, you could be
charged penalty fees if you don't pay the interest on time. And the
sooner you pay off your balance, the less interest you'll have to
pay.

Don't forget to cancel the overdraft once you
don't need it anymore and it has been repaid.

Step 5.

Get help if you can't pay your debts

Act quickly if you are having trouble making
repayments. It may be difficult to face the problem, but ignoring
it will only make things worse.

If you can't make the full repayment, pay what you can. Contact
your credit provider without delay.

If you are experiencing financial difficulties, you have the
right to apply to the credit provider for a hardship
variation. If the credit provider refuses, you can
complain to its independent dispute resolution scheme for a
variation on the grounds of hardship (see step 6 below).

There are places you can go for help - visit
www.moneysmart.gov.au for sample letters and information about
support services such as financial counselling and legal
assistance, call the National Debt Helpline on 1800 007 007 or call
ASIC's Infoline on 1300 300 630.

Contact us

ASIC Infoline: 1300 300 630

Disclaimer: Please note that this is a
summary giving you basic information about a particular topic. It
does not cover the whole of the relevant law regarding that topic,
and it is not a substitute for professional advice.